Knowing what to review on your US taxes can be a challenge, but even more so in the case of an expatriate tax return. Some expatriate tax returns can be over 100 pages in length. All the attached statements, schedules and supporting documents add to the length. Are you one of the 60% of US citizens who opt to have their tax returns prepared by a professional and are unsure how to review? This article will help guide you step by step through the process of reviewing your expatriate tax return to ensure it is correct.
US taxes have several main forms or schedules that you’ll want to make sure to give a thorough review. These likely include Form 1040, Form 2555 or Form 2555-EZ, and Form 1116.
US Taxes – Form 1040
This is the face of your US taxes. You will want to review this form carefully to ensure that your name, Social Security number(s), address and filing status are perfect. One common misconception of expatriates is that they are unable to file a joint return with their non-resident alien spouse. This is not true! You can obtain a tax identification number for your spouse. You can then elect to allow his/her income to be taxed by the US. Filing jointly on US taxes allows a larger standard deduction and you both get the Foreign Earned Income Exclusion and exemptions. Read more about filing a joint expatriate tax return with your non-US spouse on our blog.
You’ll also want to carefully check the names and Social Security numbers of your dependents. Similar to filing a joint return with a non-US spouse, you can claim your non-US children as exemptions on your US taxes. You will need tax identification numbers for them. Also, do not forget that you can claim your children under the age of 24 if they are enrolled in full-time school, regardless of the amount of income you earn. Exemptions are often overlooked because some US expats assume they cannot claim non-US citizens on their US taxes. Be sure to check with your American tax services professional before making this assumption!
Read through the remainder of the first page to make sure that everything makes sense. Did you really sell stocks to prompt a capital gain on Line 13? Do the wages reported on Line 7 make sense, or seem overstated? Did your US expat tax preparer remember to take a deduction for the student loan interest you paid on Line 33?
At the bottom of the second page, verify the amounts that you have had withheld from your paychecks (if employed by a US business). This is considered the amount of tax that you have already used to pay against your overall tax liability. If you’re due a refund and have elected to have your refund direct deposited into your bank account, triple-check you routing and account numbers shown on Line 24. It is recommended to include your daytime phone number near your signature on your US taxes. If the IRS has a question while processing, having an available phone number can sometimes speed up the resolution process. Don’t worry — the IRS doesn’t sell your information to telemarketers!
US Taxes – Form 2555
The next most important form of your US taxes is Form 2555. This form is used to calculate your foreign earned income exclusion and foreign housing deduction, if eligible. The good news about the first page of this form is that it asks straightforward questions that are typically relatively easy to answer. Carefully read through the form to ensure that the questions have been answered accurately. If you have qualified as an expatriate under the Bona Fide Residence Test, make sure that Part II has been completed in its entirety and that the dates reported on Line 14 are accurate. If you have qualified under the Physical Presence Test, Part II can be skipped and Part III on the second page should be completed. Our blog has more information on these two types of tests regarding your expatriate tax return.
Part IV of Form 2555 will calculate how much of your total income is considered “foreign earned.” This will in turn be used to allocate your housing deduction and standard deductions reported on Form 1040 or your US taxes. Read through Part IV to make sure the information is accurate and the amounts seem reasonable and truthful. Follow this methodology through the remainder of Form 2555. Verify with your expat tax preparer that your Foreign Housing deduction rates have been adjusted for the country in which you’re residing. You can also verify the limitations for specific countries for your expatriate tax return on the IRS website.
It’s important to remember that Form 2555 is required for expatriates excluding foreign income from their US earnings. Some expats assume that because they expect all of their income to be excluded, filing an expatriate tax return is unnecessary. This is not true! Income earned in a foreign country can only be excluded on your expatriate tax return if reported on a timely-filed Form 2555.
US Taxes – Form 2555-EZ
You may be able to file Form 2555-EZ for your US taxes in lieu of the more complex Form 2555. If you are not self-employed or intend to take the foreign housing exclusion, it is not an option. If your situation warrants the filing of Form 2555-EZ with your US taxes, review the direct questions asked on the form for accuracy and reasonableness. Make sure that the amounts reported on Line 18 equal the amount reported on Form 1040, Line 21 of your expatriate tax return.
US Taxes – Form 1116
Credits are dollar-for-dollar reductions of a tax liability. Taking advantage of all of the credits possible is the fastest way to reducing or eliminating your US expat tax liability. If you have paid income taxes to a foreign country, you can take a credit for those taxes on your US taxes via Form 1116. However, one important piece to remember: you cannot take a credit for the taxes paid on the foreign income that you have already excluded from your US wages, as shown on Form 2555. Nor can you take the foreign tax credit if you’ve taken advantage of the foreign housing exclusion. Our blog has more detailed information about taking advantage of the foreign tax credit on your expatriate tax return.
As with all forms for US taxes, double-check to make sure your name and Social Security number on the top of the form are correct. It is possible to have more than one Form 1116 attached to your tax return, depending on the type of income that was taxed in a foreign country. This particular form has a tendency to overwhelm some taxpayers, so review it for reasonableness and let your expatriate tax return preparer do the rest!
Speaking of Credits…
As mentioned above, credits are the best way to reduce liabilities on your US taxes. Make sure that you’re getting all of the credits for which you’re eligible. If you have children, you may be eligible to claim the child tax and/or child care credits. There are credits for high education, as well as for the investment of energy efficient improvements for your home. Check with your expatriate tax professional to see if you qualify for any additional credits on your expatriate tax return!
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